Savings black hole is looming ever larger for retirement

Published on Friday 30 May 2008 21:30

JUST in case we needed a reminder, statistics underlining just how underprepared the average household is for retirement came thick and fast this week.

For example, the typical Scot will have a retirement income of just 37 per cent of their previous earnings, as we report on page 46, while a survey by Friends Provident found that 54 per cent of women between 25 and 45 save less than 500 a year, with a third saving less than 200 annually.

Elsewhere, there was evidence in research conducted by Nationwide of a big discrepancy between intentions and actions, with most people knowing they should save, but only half doing so regularly and a fifth not at all.

It makes for depressing reading, particularly when the cost of everything from energy and fuel to food and mortgages is rising, making the prospect of putting money aside each month a preposterous idea for many households.

However, it's not just about saving regularly, but over a long period of time and in assets offering real growth to build up long-term savings, because opting for caution and putting everything in a low-risk savings environment is a risk in itself.

What's interesting about the problem of savers being too cautious is that the appetite for risk is very different when it comes to debt, such as mortgages and credit cards. Why is it seen as easier to commit to 20 years or more of mortgage repayments that stretch you to the limit than take the risks presented by the stockmarket in return for greater reward over the long term? It could be because the financial services industry has failed to create simple mass market savings products that offer good long-term returns. Or it may be a cultural issue, in that we're happy to defer the pain in the hope that it goes away.

Realistically there are myriad reasons for our inability to save effectively, but one theory is that we've been sucked in by the apparent prosperity offered by the housing market in recent years. Rising house prices have created an artificial sense of affluence and an impression that having equity in property reduces or even eliminates the need to save.

As house prices fall and other household costs rise, awareness of the need to save could rise just when it's harder to put anything aside. But over the longer-term, little short of a cultural shift in terms of attitudes to debt and long-term savings is required if widespread poverty in retirement is to be avoided.

STILL, some people are clearly desperate to get on to the housing ladder. More than 40 mortgage lenders still give some borrowers a way around the high deposits currently required by offering multiple borrower loans. In other words, if you don't have a deposit, you can team up with friends, siblings or even complete strangers to apply for a joint mortgage.

While it will be the ideal solution for some people, I suspect solicitors will be the biggest winners. What better way to ruin a valuable relationship with your best mate or even your brother or sister than to be stuck in a mortgage with them when prices are tumbling and negative equity rears its ugly head? The more people on the mortgage, the greater the chance someone will want to walk away when the going gets tough – and then the fun really begins.

FINALLY, after a short absence, the Cash Clinic feature is returning to Smart Money, offering readers the opportunity to ask the experts at accountants Grant Thornton about any area of tax planning, from inheritance and capital gains tax to personal allowances and tax-efficient investing. Please send any questions you need answered to me at 108, Holyrood Road, Edinburgh EH8 8AS or [e-mail]